Consolidating partnerships with corporations
It is not uncommon for members of a consolidated group to own all of the interests in a partnership. Matching and Acceleration Rules Under the consolidated return intercompany transaction rules of Regs. 1.1502-13, when one member of a consolidated group (S) sells an asset to another member (B) for an amount in excess of S's adjusted basis in the property, taxation of S's intercompany gain ordinarily is deferred under complex matching and acceleration rules intended to treat S and B as if they were divisions of a single entity for certain purposes (including the timing of income inclusion). 708(b)(1)(A)), S's gain on the sale of the partnership interest is deferred under Kegs. 1.1502-13 and B's basis in its partnership interest acquired from S is its cost under Sec. If the partnership subsequently liquidates, distributing its assets to B and the other partners, B's basis in the distributed assets will be determined by reference to its basis in the partnership interest under Sec. However, because B's basis in the terminated partnership's assets is determined by reference to its cost under Sec. Thus, neither the partnership interest to which the intercompany gain relates nor a successor asset is owned by a member of the consolidated group; it therefore appears that S's gain must be taken into account.If one of the partners later becomes the partnership's sole owner, unanticipated tax consequences may result under Rev. 1012 (rather than by reference to B's basis in the partnership interest itself), the assets do not qualify as successor assets under Regs. The group may assert that the nature of the asset sold by S (a partnership interest) and the identity of the asset purchased by B (the assets) are attributes that must be redetermined on a single-entity basis under the intercompany transaction regulations.Attach Form 8886 to the corporation's income tax return for each tax year in which it participated in a reportable transaction.The corporation may have to pay a penalty if it is required to file Form 8886 and does not do so. For more details, see the Instructions for Form 8886. 1.708-1 (b)(1)(iv), the terminated partnership is deemed to contribute all of its assets to a new partnership and, immediately thereafter, the terminated partnership distributes interests in the new partnership to the partners. The Tax Court reasoned that the assets attributable to the purchased partnership interest were acquired by purchase, not by distribution from the partnership. 99-6 These seemingly reasonable rules may not apply to an intercompany sale of a partnership interest if the partnership terminates because it no longer has more than one partner (i.e., a Sec. The ruling is based on the Tax Court's decision in Mc Caulsen, 45 TC 588 (1966), holding that tacking of holding periods was not permissible for assets related to the acquired partnership interest.The principals at CP are seasoned professionals that have been integrally involved as owner/operators in rolling up fragmented industries.
partnership assets) may be considered a "characteristic" of the property not subject to redetermination on a single-entity basis under the matching rule. 1.1502-13(c), S's intercompany gain will be taken into account based on B's subsequent treatment (such as depreciation or disposition gain) of the transferred property. If the asset that S sells to B is a partnership interest and the partnership remains in existence (i.e., another partner owns an interest in the partnership, so that the partnership does not terminate under Sec. The results are not changed if S's sale of the partnership interest to B results in a technical termination of the partnership under Sec. In this scenario, the new partnership interest would qualify as the successor asset under Kegs. 708(b)(1)(A) terminating sale occurs within a consolidated group, S's gain on the sale of the partnership interest should be deferred under the intercompany transaction rules, as no partnership assets have been transferred outside the consolidated group. 1.1502-13(d), S's intercompany gain must be taken into account when it becomes impossible to treat S and B as divisions of a single entity, such as when either member leaves the consolidated group. 1.1502-13(j)(1) "successor asset" rule, S's intercompany gain would not be included in income immediately, but instead would attach to the distributed assets for future inclusion in income under the matching and acceleration rules. S's gain would continue to be deferred; B would be deemed to receive interests in a new partnership with a basis determined by reference to its basis in its interest in the terminated partnership. Terminating Sale within Consolidated Group When a Sec.708(b)(1)(A) termination does not occur (because two members remain in the LLC) and, therefore, Rev. The partnership subsequently could redeem S's remaining small partnership interest, terminating the partnership in that fashion.
S and B each would take partnership assets, with a basis determined by reference to their respective bases in their partnership interests.
To escape the harsh results that may occur under Rev. 99-6, the intercompany sale transaction described above could be modified.